Investment Property – Professional Advice

At Australian Property Investor, we are specialists dealing exclusively with investment property.

If you don’t know where to start, you need expert advice from a licensed real estate agent or a buyer’s advocate, who will find the right properties based on your investment selection criteria.

Below we publish answers to some of the questions that we’ve recieved from our clients in the past.

How am I going to afford to buy an investment property?

Too often, we think of an investment property like our first home. We only see what the interest payment will do to our cash flow.

Your contribution to the interest bill though is after the tenant and the taxman have paid their share, and what’s left may be as little as $50 a week in the first year. Also remember this decreases over time as the rent rises.

I’ve been to see my Bank Manager and she says I can’t afford an Investment loan. What do I do?

It happens all the time where a Bank will turn you down even though you know you can afford it. Don’t be put off; you will need to talk to an Investment Property Finance expert who will include everything necessary in the application to put you in the strongest position. Quite often the Banks don’t have the expertise to get the deal set.

What if I don’t have a deposit for an investment property?

If you mean you have no cash, deposit cash is not needed if you have equity in your own home. If you have a regular income and security for an investment loan in the form of equity in your own home you will not need a cash deposit and can often borrow 110% of the purchase price of the Investment to cover fees and Stamp Duty.

Am I better off buying one property for $600,000 or a couple for $300,000?

This will depend on where you are buying, the amenities, the age of the property and possible tax benefits. A property in the lower end of the market usually has a higher rental yield, which results in a better cash flow.

Secondly, lower rent may attract more tenants.

Thirdly, if you wish to sell on your retirement, there’s more flexibility in selling one small property rather than one large one.

However be aware that the dearer properties quite often experience higher capital growth and you will also only have half the maintenance issues and generally better Tax benefits.

Are apartments better than houses?

There is not a simple yes or no to this question. There are many financial factors to be considered as well as personal preferences.

Houses will probably experience a higher level of capital growth, but the maintenance and property management will be higher and the rental return will generally be lower. So in the longer term, the overall returns from apartments could be the same as for houses because apartments are cheaper to own, plus you can potentially buy more of them.

In general unless you are going to buy a house and land package in a developing suburb the average investor will not want to pay the hundreds of dollars a week required to an established home in the suburb that they currently live.

How do I pick the best area for capital growth?

History has shown that property located within 2 to 10 km’s of the CBD should follow the pattern of around 10 to 11% capital growth over the long-term.

If your property grows quicker than this, it’s more likely to be for the short term only due to some major changes in the direct area such as an improvement to the local amenities or infrastructure.

You can maximise your return on your investment by structuring your finances in the best possible way and ensuring that you pay fair market value in an area within the above guidelines.

Shouldn’t I buy up market real estate in better suburbs as an investment if I can afford it and will I get better capital gains?

You will normally achieve greater capital gains but the real cost is calculated by the ratio of the rent in comparison to the property price.

The cost is how much is coming out of your pocket each week after all the factors like depreciation and Tax deductions and tax variations are considered. Just because a property valued at $300,000 might generate rent of $300 per week, it does not mean that a $550,000 property will rent for $550 per week.

In buying more expensive property you will generally have a lower rent return but if they both cost you $100 a week after tax, depreciation and rent taken into account, then surely if they both double in value in 10 years you will be $500,000- better off with the dearer property.

What if I buy an Investment Property but can’t get a tenant?

This seems to be the biggest concern of most potential Investors, currently vacancy rates for rental properties are around 2 %. This means that your property will probably be vacant one week a year, make sure you allow for this in your budget and remember that there are generally only two things that lead to a vacant property; It is run down or too expensive.

I’ve spent time looking for a bargain property but I seem to keep missing out, how long should I look before buying an investment property?

Bargains come along every now and then but try to remember the real costs in chasing a bargain. If you are investing longer-term you could spend so long looking for a bargain that prices increase before you can buy one, time heals all wounds, and so long as you pay fair market value history shows you should still achieve sound capital growth.

Don’t buy the first property you come across, but on the other hand, don’t go out with any preconceived ideas of what makes the perfect investment property, seek the advice of an investment property expert or buyers advocate. You could be looking for something that may not exist.

Spend at a minimum a month familiarising yourself with the values in the area you want to buy in and ask the Agent to supply you with a list of comparable sales so that when you do find that “right” property, you’ll immediately recognise it.

With an interest only loan, do I actually ever get to own the property?

With an interest only loan there is a perpetual debt on the property. Whilst you retain title to the property at all times whether you ever get to “own” the property outright is irrelevant.

What is important is how fast your equity increases over time. Eventually the debt will be insignificant compared to the properties’ value.

Reducing the principal reduces the interest claimable and then you’ll pay income tax on the rent at your highest marginal rate. So why would you pay it out?

The only loans you should pay out while you are building wealth are those that are not tax deductible – such as the loan on your own home, car or credit cards.

What if negative gearing is ever abolished?

The government has already made the mistake of removing the right to claim interest losses from rental property against its income.

The problems in the rental market that occurred when investors sold up were so great that it was reintroduced within two years. In the unlikely event that the government makes the same mistake twice, and abolishes negative gearing, I wouldn’t expect the change to be retrospective.

Will the Government ever remove the Capital Gains Tax?

The tax was intended to encourage long-term investment and discourage short-term speculators – and this it does very effectively.

In effect it is good as it allows us as long term investors taxation benefits whilst buying investment properties however we don’t need to pay any Capital Gains Tax until we sell the property and if the property is negatively geared the amount of Tax will increase accordingly.

If someone purchases an investment for $400,000- and it increases in value by 10% it is like earning $40,000- tax free to leverage against for their next purchase. This is as much as many of us earn after tax each year and the investment may only cost them $100- a week out of their pocket.

Is buying rental property only for those with a secure income and not for the self-employed?

What is a secure income? No income or job is 100% secure and the precautions you take with your investment properties need to be commensurate with the degree of risk you attach to your current income and employment.

A self-employed person should take all the steps such as disability insurance, income-replacement insurance, landlord insurance and possibly mortgage repayment insurance. If you let the prospect of losing your job prevent you from undertaking a loan for a rental property you will never own one.

Simply take all the necessary precautions in case the unexpected happens.

There are risks and costs to a program of action.

But they are far less than the long-range risks and costs of comfortable inaction.
John F. Kennedy (1917 – 1963)

Location, location, location – Should I buy residential property based on location alone?

Property in the best location does experience good capital growth, definitely higher than normal, however return should not be measured by the growth alone.

There is not much point in buying an investment property near all the amenities like shops, transport and parks if you have borrowed money using inappropriate loans with higher than normal interest rates; if the property is so run down that nobody will rent it.

Property that is well located, properly financed and managed will be a better investment than one selected on the basis of position alone.

Is a holiday unit on the coast in Queensland a good investment?

It can be if you distinguish between an investment and personal luxury. If it is for investment, the returns can be as good if not better than permanent lettings if it is let for half the year or more at twice the normal rental.

If however, you want it solely for your own holidays thinking it will serve as an investment as well you’re incorrect; none of the expenses (including interest) are tax deductible so it would be an expensive luxury.

Another thing to watch out for is the cost of a managed investment can be around 50% of the rental income well above that of a permanent residential investment property.

I was brought up to believe that borrowing money is bad. Was I misled by my parents?

The golden rule of borrowing money is to borrow for assets such as property that go up in value over time not down. Don’t borrow for consumables, things that depreciate in value.

Our parents were right in telling us not to borrow money for cars and clothes etc, which ultimately are worthless.

However, no one told them that debt, if used for appreciating assets such as investment property, is a most powerful way to build wealth for retirement.

What if interest rates rise?

If rates are low you should fix them when setting your finance up so you can protect yourself from rising interest payments. If they drop consider it the cost of an insurance policy and if they rise smile.

You must also remember that interest rate drops generally come before property price rises.

What if real estate prices don’t go up?

Prices have historically always risen when buying in the 2-10 km radius of any major Australian City; in fact prices tend to double every 7-10 years.

We recommend property investment to those who have a long term buy and hold plan as the costs of buying and selling are substantial. Historically prices fluctuate but always rise over the longer term.

I have about $380,000 in equity in my home. How much can I afford to borrow to buy an Investment Property?

The answer to this question will be different for everyone, it’s just as important to consider your ability to be able to repay the loan.

Some people own a very valuable property worth millions and live in it but have no income; because their income is limited they are not able to borrow very much at all. No matter what your properties are worth, when it comes to borrowing money the Banks always take your income and cash flow into account.

To get an accurate answer you need to speak to an Investment Property Finance expert, not the local Bank Manager as he may not be experienced in setting up finance for Investment Property and not aware of all the depreciation and tax benefits you need to take into account.

Why hasn’t my accountant told me everything about investing in property?

Generally they will be able to answer your questions competently, but you should seek out a specialist to help you with your wealth creation program.

Accountants are usually specialists in their area of expertise and very conservative in nature. They will expertly complete your tax return for you after you have provided them with all the figures. They are usually not specialists in investment property and should never be relied on as such.

There are some accountants who do specialise in property – and even have some investment properties of their own, these are the ones to talk to as they have personal experience and will be able to guide you step by step in the process from setting goals to achieving them.

The property market seems to be stagnant, is it still a good time to buy a rental property?

Successful investors look on a softening in the market as a great time to buy an investment property and they then take all the steps necessary to ensure that they are able to hold long term to reap the rewards of a future recovery.

Should I buy a property in partnership with a family member or friend?

Quite often this is a sure recipe to lose a friend. If the investment is a good one, do it by yourself. Different people often have different ideas on investments.

However sometimes it is the only way you can afford to get started in property investment; if you do decide to have a go make sure you agree on your goals with the investment first then have a go, but be aware of the possible negatives.


Planning your Investment


Buying an Investment Property


Investing in a Property


Property Management

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